Federal Contracts for Biotech: Opportunities, With Strings Attached

The U.S. federal government is increasingly focused on the biotech and broader life sciences industry. This creates both risks and opportunities.  As we discussed in a recent blog post—recent U.S. government scrutiny of the life sciences industry may threaten to complicate cross-border collaboration and licensing, particularly between U.S. and Chinese entities.[1]  On the brighter side—the U.S. government is also signaling a continued interest in funding and supporting U.S. biotech innovations, particularly those with promising applications in the defense industry:  

• As we previously addressed in detail, earlier this year Congress acted to renew and reform the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, which have long provided important sources of non-dilutive funding for small U.S. businesses pursuing life sciences R&D with commercial applications.[2]
• On the heels of the SBIR/STTR reauthorization, the National Institutes of Health (NIH) have announced new SBIR funding opportunities, including for “Strategic Breakthrough” awards to help fund companies that have already successfully participated in the SBIR program and need additional funding toward commercialization.  Compared to typical SBIR/STTR awards, Strategic Breakthrough awards can be much larger—up to $30 million over a 48-month period of performance—and are intended to help early-stage companies bridge the “valley of death” between the time when initial funding is awarded and more significant financing and commercial revenue is available.[3]
• Draft versions of the National Defense Authorization Act (NDAA) for Fiscal Year 2027 indicate additional focus on and opportunities for funding innovative biotech solutions, including the House’s proposed Section 227, which would provide for “Prize Competitions to Support the Research and Development of Biotechnology for the Department of Defense.”  Compared to traditional contracts and grants—which provide funding to a select group of recipients before the government receives any results—prize contests allow potentially innumerable contestants to compete, and the government only pays once a contestant proves it has met the criteria for success.  This ability to include diverse contestants from unlimited disciplines maximizes the likelihood of finding novel solutions to seemingly impenetrable scientific and technological problems.[4] 

Of course, pursuing U.S. funding can create complications of its own.  Perhaps most significantly, concerns around foreign collaboration—particularly collaboration involving China, Russia, Iran, and North Korea—are heightened when U.S. agencies are involved, particularly defense agencies.  Recent reforms to the SBIR/STTR programs enhance requirements for applicants to fully disclose foreign collaborations and relationships,[5] and a recent decision from the U.S. Court of Federal Claims confirms that agencies have significant discretion to reject applicants based on concerns around foreign influence.[6]  Beyond the SBIR/STTR programs, defense agencies are increasingly prohibited from contracting with companies that have ties to certain designated entities.  Notably, the various lists of such designated entities have recently been expanded to include Chinese entities that are active in the Biotech industry (e.g., WuXi AppTec Co., Ltd), subject to ongoing litigation in federal district courts. 

And scrutiny of foreign collaboration is just the tip of the iceberg when it comes to compliance obligations and expectations associated with contracts, grants, cooperative agreements, and “other transactions” with U.S. agencies.  Those funding agreements are heavily regulated and subject to a variety of boilerplate terms and conditions that can impact essentially every aspect of a company’s operations: e.g., intellectual property, supply chain, employment and personnel practices, cybersecurity.   Any company receiving a new federal grant or contract should be prepared to make potentially significant changes to their compliance and operations in accordance with the agreement’s terms.  While many of the obligations can be siloed around the specific business units that are performing the federal agreement, some obligations have more far-reaching impact and must be considered on a clause-by-clause basis.   

Complicating matters further, the longstanding regulations that have governed federal contracts, grants, and cooperative agreements are currently be overhauled through the administrative rulemaking process.  At a minimum, this is creating significant near-term confusion and inconsistency around which requirements (and which versions of those requirements) should be incorporated by reference into any given agreement.  Even for companies that have already successfully navigated federal funding agreements, the regulatory overhaul will inevitably require a compliance refresh. 

Recent activity in the U.S. legislature, executive agencies, and federal courts confirm a heightened focus on the biotech industry—creating both risks and opportunities.  The opportunities to obtain and leverage federal funding appear strongest for U.S. biotech companies seeking funding to develop technology that, if commercialized, can benefit the defense industry.  However, federal funds almost always come with strings attached—requiring careful planning and execution, often involving complex and cross-border regulatory and trade issues.  Freshfields’ global network of life sciences, trade sanctions, public procurement, and regulatory practitioners will continue to monitor and report on these developments.

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